UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
--------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
-------------------- --------------------
Commission file number 1-720
----------------------------------------------------
PHILLIPS PETROLEUM COMPANY
(Exact name of registrant as specified in its charter)
Delaware 73-0400345
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Phillips Building, Bartlesville, Oklahoma 74004
(Address of principal executive offices) (Zip Code)
918-661-6600
(Registrant's telephone number, including area code)
---------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
----- -----
The registrant had 252,509,418 shares of common stock, $1.25 par value,
outstanding at April 30, 1999.
<PAGE>
PART I. FINANCIAL INFORMATION
- -----------------------------------------------------------------
Consolidated Statement of Income Phillips Petroleum Company
Millions of Dollars
-------------------
Three Months Ended
March 31
-------------------
1999 1998*
-------------------
Revenues
Sales and other operating revenues $2,421 3,093
Equity in earnings of affiliated companies 21 26
Other revenues 97 135
- -----------------------------------------------------------------
Total Revenues 2,539 3,254
- -----------------------------------------------------------------
Costs and Expenses
Purchased crude oil and products 1,347 1,698
Production and operating expenses 510 542
Exploration expenses 47 50
Selling, general and administrative expenses 175 157
Depreciation, depletion and amortization 220 231
Taxes other than income taxes 61 65
Interest expense 67 46
Preferred dividend requirements of
capital trusts 13 13
- -----------------------------------------------------------------
Total Costs and Expenses 2,440 2,802
- -----------------------------------------------------------------
Income before income taxes 99 452
Provision for income taxes 29 209
- -----------------------------------------------------------------
Net Income $ 70 243
=================================================================
Net Income Per Share of Common Stock
Basic $ .28 .93
Diluted .28 .92
- -----------------------------------------------------------------
Dividends Paid $ .34 .34
- -----------------------------------------------------------------
Average Common Shares Outstanding
(in thousands)
Basic 252,108 262,256
Diluted 253,427 264,367
- -----------------------------------------------------------------
See Notes to Financial Statements.
*Reclassified to conform to current presentation.
1
<PAGE>
- -----------------------------------------------------------------
Consolidated Balance Sheet Phillips Petroleum Company
Millions of Dollars
-----------------------
March 31 December 31
1999 1998
-----------------------
Assets
Cash and cash equivalents $ 209 97
Accounts and notes receivable (less
allowances: 1999--$16; 1998--$13) 1,355 1,282
Inventories 539 540
Deferred income taxes 198 217
Prepaid expenses and other current assets 255 213
- -----------------------------------------------------------------
Total Current Assets 2,556 2,349
Investments and long-term receivables 1,026 1,015
Properties, plants and equipment (net) 10,610 10,585
Deferred income taxes 103 100
Deferred charges 165 167
- -----------------------------------------------------------------
Total $14,460 14,216
=================================================================
Liabilities
Accounts payable $ 1,349 1,340
Notes payable and long-term debt due
within one year 117 167
Accrued income and other taxes 199 182
Other accruals 390 443
- -----------------------------------------------------------------
Total Current Liabilities 2,055 2,132
Long-term debt 4,490 4,106
Accrued dismantlement, removal and
environmental costs 719 729
Deferred income taxes 1,301 1,317
Employee benefit obligations 430 424
Other liabilities and deferred credits 610 639
- -----------------------------------------------------------------
Total Liabilities 9,605 9,347
- -----------------------------------------------------------------
Company-Obligated Mandatorily Redeemable
Preferred Securities of Phillips
Capital Trusts I and II 650 650
- -----------------------------------------------------------------
Common Stockholders' Equity
Common stock--500,000,000 shares
authorized at $1.25 par value
Issued (306,380,511 shares)
Par value 383 383
Capital in excess of par 2,062 2,055
Treasury stock (at cost:
1999--25,024,863 shares;
1998--25,259,040 shares) (1,248) (1,259)
Compensation and Benefits Trust (CBT)
(at cost: 1999--29,125,863 shares;
1998--29,125,863 shares) (987) (987)
Accumulated other comprehensive income
Foreign currency translation adjustments (34) (22)
Unrealized gain on available-for-sale
securities 9 9
Unearned employee compensation--Long-
Term Stock Savings Plan (LTSSP) (299) (303)
Retained earnings 4,319 4,343
- -----------------------------------------------------------------
Total Common Stockholders' Equity 4,205 4,219
- -----------------------------------------------------------------
Total $14,460 14,216
=================================================================
See Notes to Financial Statements.
2
<PAGE>
- -----------------------------------------------------------------
Consolidated Statement of Phillips Petroleum Company
Cash Flows
Millions of Dollars
-------------------
Three Months Ended
March 31
-------------------
1999 1998
-------------------
Cash Flows from Operating Activities
Net income $ 70 243
Adjustments to reconcile net income to net
cash provided by operating activities
Non-working capital adjustments
Depreciation, depletion and
amortization 220 231
Dry hole costs and leasehold impairment 21 12
Deferred taxes 4 51
Other (22) 29
Working capital adjustments
Increase in aggregate balance of
accounts receivable sold 9 150
Decrease (increase) in other accounts
and notes receivable (90) 2
Increase in inventories (4) (28)
Increase in prepaid expenses and other
current assets (24) (54)
Decrease in accounts payable (9) (112)
Increase (decrease) in taxes and other
accruals (6) 117
- -----------------------------------------------------------------
Net Cash Provided by Operating Activities 169 641
- -----------------------------------------------------------------
Cash Flows from Investing Activities
Capital expenditures and investments,
including dry hole costs (368) (416)
Proceeds from asset dispositions 104 12
Long-term advances to affiliates and
other investments (2) (6)
- -----------------------------------------------------------------
Net Cash Used for Investing Activities (266) (410)
- -----------------------------------------------------------------
Cash Flows from Financing Activities
Issuance of debt 499 330
Repayment of debt (164) (311)
Purchase of company common stock (12) (106)
Issuance of company common stock 3 7
Dividends paid on common stock (86) (89)
Other (31) (31)
- -----------------------------------------------------------------
Net Cash Provided by (Used for) Financing
Activities 209 (200)
- -----------------------------------------------------------------
Increase in Cash and Cash Equivalents 112 31
Cash and cash equivalents at beginning
of period 97 163
- -----------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 209 194
=================================================================
See Notes to Financial Statements.
3
<PAGE>
- -----------------------------------------------------------------
Notes to Financial Statements Phillips Petroleum Company
Note 1--Interim Financial Information
The financial information for the interim periods presented in
the financial statements included in this report is unaudited and
includes all known accruals and adjustments which Phillips
Petroleum Company (hereinafter referred to as "Phillips" or "the
company") considers necessary for a fair presentation of the
consolidated financial position of the company and its results of
operations and cash flows for such periods. All such adjustments
are of a normal and recurring nature.
Note 2--Inventories
Inventories consisted of the following:
Millions of Dollars
-----------------------
March 31 December 31
1999 1998
-----------------------
Crude oil and petroleum products $190 177
Chemical products 258 264
Materials, supplies and other 91 99
- -----------------------------------------------------------------
$539 540
=================================================================
Note 3--Properties, Plants and Equipment
Properties, plants and equipment included the following:
Millions of Dollars
-----------------------
March 31 December 31
1999 1998
-----------------------
Properties, plants and equipment
(at cost) $22,872 22,868
Less accumulated depreciation,
depletion and amortization 12,262 12,283
- -----------------------------------------------------------------
$10,610 10,585
=================================================================
Note 4--Debt
In March 1999, the company issued $300 million of 6 3/8% Notes
due 2009, and $200 million of 7% Debentures due 2029, in the
public market.
4
<PAGE>
At March 31, 1999, there was no revolving debt outstanding under
the company's $1.5 billion revolving credit facility, but
$663 million of commercial paper was outstanding, which is
supported 100 percent by the credit facility. Also, the Phillips
Petroleum Company Norway $300 million revolving credit facility
was fully drawn at March 31, 1999.
Note 5--Income Taxes
The company's effective tax rates for the three-month periods
ended March 31, 1999 and 1998, were 29 and 46 percent,
respectively. The 1999 effective rate was impacted by favorable
resolution of certain outstanding issues with the Internal
Revenue Service (IRS). The effective rate for the three-month
period ended March 31, 1999, excluding benefit of the IRS
settlement, was 50 percent, reflecting a larger proportion of
foreign earnings, which are generally taxed at a higher rate.
Note 6--Contingencies
In the case of all known contingencies, the company accrues an
undiscounted liability when the loss is probable and the amount
is reasonably estimable. These liabilities are not reduced for
potential insurance recoveries. If applicable, undiscounted
receivables are accrued for probable insurance or other third
party recoveries. Based on currently available information, the
company believes that it is remote that future costs related to
known contingent liability exposures will exceed current accruals
by an amount that would have a material adverse impact on the
company's financial statements.
As facts concerning contingencies become known to the company,
the company reassesses its position both with respect to accrued
liabilities and other potential exposures. Estimates that are
particularly sensitive to future change include contingent
liabilities recorded for environmental remediation, tax and legal
matters. Estimated future environmental remediation costs are
subject to change due to such factors as the unknown magnitude of
clean-up costs, the unknown time and extent of such remedial
actions that may be required, and the determination of the
company's liability in proportion to other responsible parties.
Estimated future costs related to tax and legal matters are
subject to change as events evolve and as additional information
becomes available during the administrative and litigation
process.
5
<PAGE>
Environmental--The company is subject to federal, state and local
environmental laws and regulations. These may result in
obligations to remove or mitigate the effects on the environment
of the placement, storage, disposal or release of certain
chemical, mineral and petroleum substances at various sites. The
company is currently participating in environmental assessments
and clean-up under these laws at federal Superfund and comparable
state sites. In the future, the company may be involved in
additional environmental assessments, clean-ups and proceedings.
Other Legal Proceedings--The company is a party to a number of
other legal proceedings pending in various courts or agencies for
which, in some instances, no provision has been made.
Other Contingencies--The company has contingent liabilities
resulting from throughput agreements with pipeline and processing
companies in which it holds stock interests. Under these
agreements, Phillips may be required to provide any such company
with additional funds through advances, most of which can be
recovered through reductions of future charges for the shipping
or processing of petroleum liquids, natural gas and refined
products.
Note 7--Cash Flow Information
Cash payments for the three-month periods ended March 31 were as
follows:
Millions of Dollars
-------------------
1999 1998
-------------------
Non-Cash Investing and Financing Activities
Treasury stock awards issued under
incentive compensation plans $ 4 8
- -----------------------------------------------------------------
Cash Payments
Interest
Debt $79 53
Taxes and other 1 3
- -----------------------------------------------------------------
$80 56
=================================================================
Income taxes $ 9 7
- -----------------------------------------------------------------
Note 8--Environmental Cost Recovery
During the first quarter of 1998, as part of a comprehensive
environmental cost recovery project, the company entered into
binding settlement agreements with certain of the company's
historical liability insurers in exchange for certain releases or
6
<PAGE>
commutations of their liabilities to the company under its
historical liability and pollution policies. As a result of
these settlement agreements, the company recorded a before-tax
benefit to earnings of $106 million, $69 million after-tax in the
first quarter of 1998.
Note 9--Comprehensive Income
Phillips' comprehensive income for the three-month periods ended
March 31 was as follows:
Millions of Dollars
-------------------
1999 1998
-------------------
Net income $ 70 243
After-tax changes in foreign currency
translation adjustments (12) -
- -----------------------------------------------------------------
Comprehensive income $ 58 243
=================================================================
Note 10--Segment Disclosures
The company has organized its reporting structure based on the
grouping of similar products and services, resulting in four
operating segments:
(1) Exploration and Production (E&P)--This segment explores for
and produces crude oil, natural gas and natural gas liquids
on a worldwide basis.
(2) Gas Gathering, Processing and Marketing (GPM)--This segment
gathers and processes both natural gas produced by others
and natural gas produced from the company's own reserves,
primarily in Oklahoma, Texas and New Mexico.
(3) Refining, Marketing and Transportation (RM&T)--This segment
refines, markets and transports crude oil and petroleum
products, primarily in the United States. This segment also
fractionates and markets natural gas liquids.
(4) Chemicals--This segment manufactures and markets
petrochemicals and plastics on a worldwide basis.
Corporate and All Other includes general corporate overhead; all
interest revenue and expense, including preferred dividend
requirements of capital trusts; certain eliminations; and various
other corporate activities, such as the company's captive
insurance subsidiary and tax items not directly attributable to
the operating segments.
7
<PAGE>
The company evaluates performance and allocates resources based
on, among other items, net income. Intersegment sales are
recorded at market value. There have been no material changes in
the basis of segmentation or in the basis of measurement of
segment net income since the 1998 annual report.
Analysis of Results by Operating Segment
Millions of Dollars
------------------------------
Operating Segments
------------------------------
E&P GPM RM&T Chemicals
Three Months Ended March 31, 1999 ------------------------------
Sales and Other Operating Revenues
External customers $556 154 1,217 494
Intersegment (eliminations) 83 111 94 26
- ------------------------------------------------------------------
Segment sales $639 265 1,311 520
==================================================================
Net income (loss) $ 90 6 (8) 29
==================================================================
Three Months Ended March 31, 1998
Sales and Other Operating Revenues
External customers $790 200 1,474 629
Intersegment (eliminations) 118 156 98 36
- ------------------------------------------------------------------
Segment sales $908 356 1,572 665
==================================================================
Net income $ 93 19 29 75
==================================================================
Millions of Dollars
-----------------------------
Corporate
and All Other Consolidated
Three Months Ended March 31, 1999 -----------------------------
Sales and Other Operating Revenues
External customers $ - 2,421
Intersegment (eliminations) (314) -
- ------------------------------------------------------------------
Segment sales $(314) 2,421
==================================================================
Net income (loss) $ (47) 70
==================================================================
Three Months Ended March 31, 1998
Sales and Other Operating Revenues
External customers $ - 3,093
Intersegment (eliminations) (408) -
- ------------------------------------------------------------------
Segment sales $(408) 3,093
==================================================================
Net income $ 27 243
==================================================================
8
<PAGE>
- -----------------------------------------------------------------
Management's Discussion and Phillips Petroleum Company
Analysis of Financial Condition
and Results of Operations
Management's Discussion and Analysis contains forward-looking
statements including, without limitation, statements relating to
the company's plans, strategies, objectives, expectations,
intentions, and adequate resources, that are made pursuant to the
"safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995. The words "intends," "believes," "expects,"
"plans," "scheduled," "anticipates," "estimates," and similar
expressions identify forward-looking statements. The company
does not undertake to update, revise or correct any of the
forward-looking information. Readers are cautioned that such
forward-looking statements should be read in conjunction with the
company's disclosures under the heading: "CAUTIONARY STATEMENT
FOR THE PURPOSES OF THE 'SAFE HARBOR' PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995," beginning on page 36.
RESULTS OF OPERATIONS
Unless otherwise indicated, discussion of results for the three-
month period ending March 31, 1999, is based on a comparison with
the corresponding period in 1998.
Consolidated Results
A summary of the company's net income by business segment
follows:
Millions of Dollars
-------------------
Three Months Ended
March 31
-------------------
1999 1998
-------------------
Exploration and Production (E&P) $ 90 93
Gas Gathering, Processing and Marketing (GPM) 6 19
Refining, Marketing and Transportation (RM&T) (8) 29
Chemicals 29 75
Corporate and Other (47) 27
- -----------------------------------------------------------------
Net Income $ 70 243
=================================================================
9
<PAGE>
Net income is affected by transactions, defined by Management and
termed "special items," which are not representative of the
company's ongoing operations. These transactions can obscure the
underlying operating results for a period and affect
comparability of operating results between periods. The
following table summarizes the gains/(losses), on an after-tax
basis, from special items included in the company's reported net
income:
Millions of Dollars
-------------------
Three Months Ended
March 31
-------------------
1999 1998
-------------------
Pending claims and settlements $ 38 66
Foreign currency gains (losses) (14) 6
Net gains on asset sales 33 -
Work force reduction charges (5) -
- -----------------------------------------------------------------
Total special items $ 52 72
=================================================================
Excluding the special items listed above, the company's net
operating income by business segment was:
Millions of Dollars
-------------------
Three Months Ended
March 31
-------------------
1999 1998
-------------------
E&P $ 54 98
GPM 7 19
RM&T (6) 29
Chemicals 23 75
Corporate and Other (60) (50)
- -----------------------------------------------------------------
Net operating income $ 18 171
=================================================================
Phillips' net income in the first quarter of 1999 was
$70 million, a 71 percent decrease from net income of
$243 million in the first quarter of 1998. Net income benefited
$52 million from special items in the first quarter of 1999 and
benefited $72 million from special items in the first quarter of
1998. After excluding these special items, net operating income
for the first quarter of 1999 was $18 million, an 89 percent
decline from $171 million in the first quarter of 1998.
10
<PAGE>
The decline in net operating income was due to lower crude oil,
natural gas and natural gas liquids prices, as well as lower
margins in the company's downstream businesses. Operating
results benefited from cost reduction efforts, with controllable
costs down 6 percent, and per-unit operating costs generally
lower as well.
Three Months Ended
March 31
-------------------
Phillips at a Glance 1999 1998
-------------------
U.S. crude oil production (MBD) 57 64
Worldwide crude oil production (MBD) 233 250
U.S. natural gas production (MMCFD) 982 991
Worldwide natural gas production (MMCFD) 1,478 1,602
Worldwide natural gas liquids
production (MBD) 156 177
Liquefied natural gas sales (MMCFD) 130 143
Refinery utilization rate (%) 95 94
U.S. automotive gasoline sales (MBD)* 294 299
U.S. distillates sales (MBD) 138 130
Worldwide petroleum products sales (MBD)* 670 656
Natural gas liquids processed (MBD) 205 225
Ethylene production (MMlbs)** 702 833
Polyethylene production (MMlbs)** 655 563
Polypropylene production (MMlbs)** 129 113
Paraxylene production (MMlbs) 107 188
- -----------------------------------------------------------------
*Includes certain sales by the Chemicals segment.
**Includes Phillips' share of equity affiliates' production.
Income Statement Analysis
Sales and other operating revenues decreased 22 percent in the
first quarter of 1999, reflecting lower average sales prices
across most of the company's major product lines. Lower prices
for crude oil, petroleum products and natural gas primarily
accounted for the 21 percent decline in purchase costs.
Equity in earnings of affiliated companies decreased 19 percent
in the first quarter of 1999, mainly the result of lower ethylene
margins experienced by Sweeny Olefins Limited Partnership, in
which Phillips owns a 50 percent interest. Other revenues were
28 percent lower in the first quarter of 1999, compared with the
first quarter of 1998, primarily because the 1998 period included
recoveries from certain of the company's historical liability and
pollution insurers related to claims made as part of a
comprehensive environmental cost recovery project. This was
partially offset by net gains on asset sales recorded in the
first quarter of 1999.
11
<PAGE>
After adjustment for special items, controllable costs--primarily
production and operating expenses; and selling, general and
administrative expenses--declined 6 percent in the first quarter
of 1999. The lower costs are attributable to general cost
reduction efforts across all business lines, as well as lower
fuel costs, maintenance and contractor costs.
Exploration expenses decreased 6 percent in the first quarter of
1999, reflecting lower geological and geophysical expenses,
partially offset by higher dry hole costs.
Depreciation, depletion and amortization (DD&A) declined
5 percent in the first quarter of 1999, primarily due to lower
DD&A in the company's U.S. E&P operations. Property impairments
taken in the fourth quarter of 1998, as well as lower production
volumes in the first quarter of 1999, resulted in the decreased
U.S. E&P DD&A.
Taxes other than income taxes decreased 6 percent in the first
quarter of 1999, mainly the result of lower emission taxes in
Norway. This was primarily due to lower fuel consumption
resulting from the increased efficiency of the new Ekofisk II
turbines, as well as lower production volumes.
Interest expense increased 46 percent in the first quarter of
1999, reflecting higher average debt levels compared with the
first quarter of 1998. Preferred dividend requirements were
unchanged from a year ago.
12
<PAGE>
Segment Results
E&P
Three Months Ended
March 31
-------------------
1999 1998
-------------------
Millions of Dollars
-------------------
Operating Income
Reported net income $90 93
Less special items 36 (5)
- -----------------------------------------------------------------
Net operating income $54 98
=================================================================
Dollars Per Unit
-------------------
Average Sales Prices
Crude oil (per barrel)
United States $ 9.93 12.20
Foreign 11.22 13.99
Worldwide 10.88 13.55
Natural gas--lease
(per thousand cubic feet)
United States 1.60 1.98
Foreign 2.44 2.56
Worldwide 1.95 2.25
- -----------------------------------------------------------------
Millions of Dollars
-------------------
Worldwide Exploration Expenses
Geological and geophysical $24 36
Leasehold impairment 6 5
Dry holes 15 7
Lease rentals 2 2
- -----------------------------------------------------------------
$47 50
=================================================================
Thousands of
Barrels Daily
-------------------
Operating Statistics
Crude oil produced
United States 57 64
Norway 103 116
United Kingdom 29 27
Nigeria 22 22
China 14 14
Canada 7 7
Venezuela 1 -
- -----------------------------------------------------------------
233 250
=================================================================
13
<PAGE>
Three Months Ended
March 31
-------------------
1999 1998
-------------------
Thousands of
Barrels Daily
-------------------
Natural gas liquids produced
United States 2 3
Norway 3 8
Other areas 5 6
- -----------------------------------------------------------------
10 17
=================================================================
Millions of
Cubic Feet Daily
-------------------
Natural gas produced*
United States 982 991
Norway 148 266
United Kingdom 256 254
Canada 92 91
- -----------------------------------------------------------------
1,478 1,602
=================================================================
*Represents quantities available for sale. Excludes gas
equivalent of natural gas liquids shown above.
Liquefied natural gas sales 130 143
- -----------------------------------------------------------------
E&P's net operating income decreased 45 percent in the first
quarter of 1999, reflecting lower sales prices for crude oil,
natural gas, and liquefied natural gas. In addition, lower
production volumes for both natural gas and crude oil negatively
impacted earnings. These items were partially offset by lower
U.S. depreciation, depletion and amortization charges and lifting
costs.
Phillips' worldwide average sales prices declined $2.67 per
barrel (20 percent) for crude oil and $.30 per thousand cubic
feet (13 percent) for natural gas in the first quarter of 1999.
Industry crude oil prices, which had been declining since late
1996 on market oversupply and a weak Asian economy, rallied
significantly in March and April of this year. An agreement
reached in late March by the major exporting countries to reduce
production provided the initiative for the price rebound. If the
improved crude oil prices are sustained through the second
quarter of 1999, the company expects improved financial results
from the E&P segment.
14
<PAGE>
U.S. E&P
- --------
Millions of Dollars
-------------------
Three Months Ended
March 31
-------------------
1999 1998
-------------------
Operating Income
Reported net income $73 59
Less special items 35 (3)
- -----------------------------------------------------------------
Net operating income $38 62
=================================================================
Net operating income declined 39 percent in the company's U.S.
E&P operations, primarily due to lower natural gas, crude oil and
liquefied natural gas sales prices. Phillips' U.S. E&P natural
gas sales price averaged $1.60 in the first quarter of 1999,
19 percent lower than the corresponding quarter a year ago. The
decline resulted from warmer-than-normal winter weather, coupled
with excess industry storage levels. Benefiting U.S. E&P results
for the quarter were lower depreciation, depletion and
amortization costs, reflecting fourth quarter 1998 property
impairments and lower production levels. Lower lifting costs
also positively impacted first quarter 1999 results.
U.S. crude oil production declined 11 percent in the first
quarter of 1999, reflecting the impact of asset sales and normal
field declines. U.S. natural gas production in the first quarter
of 1999 was slightly lower than a year ago, as improved
production from the San Juan basin was offset by field declines
in the Gulf of Mexico.
Special items in the first quarter of 1999 included net gains on
asset sales of $32 million after-tax, as well as favorable
contingency settlements. The only special item in the first
quarter of 1998 was a contingency accrual.
15
<PAGE>
Foreign E&P
- -----------
Millions of Dollars
-------------------
Three Months Ended
March 31
-------------------
1999 1998
-------------------
Operating Income
Reported net income $17 34
Less special items 1 (2)
- -----------------------------------------------------------------
Net operating income $16 36
=================================================================
Net operating income from the company's foreign E&P operations
decreased 56 percent in the first quarter of 1999, reflecting
lower crude oil and natural gas production and sales prices.
Foreign crude oil production declined 5 percent in the first
quarter of 1999, reflecting lower production from Norway due to
processing constraints and operating problems following the
conversion to Ekofisk II. Foreign natural gas production
decreased 19 percent in the first quarter of 1999, also the
result of lower production from Norway. When the production
license for Ekofisk was extended from 2011 to 2028, Ekofisk II
was designed with lower gas processing capacity than that of the
original Ekofisk facilities, to better match the capacity
requirements with the normal decline of the field. This should
yield a better overall economic performance over the remaining
years of the production license.
The entire Ekofisk II Complex was shut down on April 22, 1999,
because of a leaking gas cooler. During the shutdown, the
company repaired the gas cooler and was also able to repair a
poorly performing low-pressure oil separator and complete
priority maintenance work, part of the work that was originally
scheduled to be included in an August shutdown. The repairs,
originally expected to require a two-week shutdown, were
completed in 10 days. It is anticipated that this shutdown will
lower Norway's second quarter 1999 liquids and gas production by
approximately 15,000 barrels per day and 30 million cubic feet
per day, respectively. In addition, the initial performance of
the gas processing plant has been below expectations. A field
shutdown is scheduled for August 1999 to make modifications to
improve performance of the plant.
Foreign currency transaction gains and losses were the only
special items in the first quarter of 1999 and 1998.
16
<PAGE>
GPM
Three Months Ended
March 31
-------------------
1999 1998
-------------------
Millions of Dollars
-------------------
Operating Income
Reported net income $ 6 19
Less special items (1) -
- -----------------------------------------------------------------
Net operating income $ 7 19
=================================================================
Dollars Per Unit
-------------------
Average Sales Prices
U.S. residue gas
(per thousand cubic feet) $1.68 2.09
U.S. natural gas liquids
(per barrel--unfractionated) 7.89 10.12
- -----------------------------------------------------------------
Millions of
Cubic Feet Daily
-------------------
Operating Statistics
Natural gas purchases
Outside Phillips 1,206 1,348
Phillips 154 156
- -----------------------------------------------------------------
1,360 1,504
=================================================================
Raw gas throughput 1,700 1,915
- -----------------------------------------------------------------
Residue gas sales
Outside Phillips 884 981
Phillips 54 62
- -----------------------------------------------------------------
938 1,043
=================================================================
Thousands of
Barrels Daily
-------------------
Natural gas liquids net production
From Phillips E&P leasehold gas 15 15
From gas purchased outside Phillips 131 145
- -----------------------------------------------------------------
146 160
=================================================================
GPM's net operating income decreased 63 percent in the first
quarter of 1999, as lower natural gas liquids prices tightened
margins. Natural gas liquids prices were 22 percent lower than a
year ago, while residue gas sales prices declined 20 percent.
Industry natural gas liquids prices have generally followed the
steep decline in crude oil prices, while industry residue gas prices
declined on warmer-than-normal winter weather and excess industry
storage levels. Positively impacting first quarter 1999 results
was a $2.5 million after-tax gain on the sale of GPM's existing
helium inventory.
17
<PAGE>
Raw gas throughput, natural gas liquids production and residue
gas sales volumes were all lower than a year ago. Due to the low
price environment, there has been a reduction in new drilling
activity and well workovers that would typically help to offset
normal volume decline. In addition, a small number of producers
have elected to shut in some production.
Special items in the first quarter of 1999 represented work force
reduction charges.
18
<PAGE>
RM&T
Three Months Ended
March 31
-------------------
1999 1998
-------------------
Millions of Dollars
-------------------
Operating Income
Reported net income (loss) $(8) 29
Less special items (2) -
- -----------------------------------------------------------------
Net operating income (loss) $(6) 29
=================================================================
Dollars Per Unit
-------------------
Average Sales Prices (per gallon)
Automotive gasoline
Wholesale $.42 .51
Retail .56 .67
Distillates .37 .46
- -----------------------------------------------------------------
Thousands of
Barrels Daily
-------------------
Operating Statistics
U.S. refinery crude oil
Capacity 355 355
Crude runs 336 335
Capacity utilization (percent) 95% 94
Natural gas liquids fractionation
Capacity 252 252
Processed 205 225
Capacity utilization (percent) 81% 89
Refinery and natural gas liquids production 569 585
- -----------------------------------------------------------------
Petroleum products outside sales
United States
Automotive gasoline
Wholesale 236 213
Retail 34 38
Spot 14 39
Aviation fuels 27 30
Distillates
Wholesale and retail 108 90
Spot 30 40
Natural gas liquids (fractionated) 135 135
Other products 39 28
- -----------------------------------------------------------------
623 613
Foreign 36 33
- -----------------------------------------------------------------
659 646
=================================================================
19
<PAGE>
RM&T had a net operating loss of $6 million in the first quarter
of 1999, compared with net operating income of $29 million for
the corresponding quarter in 1998. Although the company's
refineries ran at 95 percent of capacity during the first quarter
of 1999, gasoline and distillates margins were lower, negatively
impacting both refining and marketing operations. Phillips'
average wholesale sales prices for gasoline and distillates
declined 18 and 20 percent in the first quarter of 1999,
respectively, compared with first quarter 1998, while the average
cost per barrel of crude oil feedstocks declined 17 percent, thus
tightening refining margins. The company has recently
experienced improved margins, and expects second quarter
financial results to be improved for RM&T if the improved margins
are sustained through the remainder of the second quarter.
Results from the natural gas liquids fractionation business were
slightly lower in the quarter, primarily due to lower natural gas
liquids prices and processing volumes. Earnings from pipeline
operations improved, reflecting the expansion of the Seaway
pipeline system completed during 1998.
Controllable costs in the RM&T segment were lower in the first
quarter of 1999, primarily due to lower fuel, maintenance and
contract services costs. These lower costs were partially offset
by costs incurred associated with the proposed Diamond 66
transaction.
Special items in the first quarter of 1999 included work force
reduction charges, partially offset by net gains on asset sales.
20
<PAGE>
Chemicals
Three Months Ended
March 31
-------------------
1999 1998
-------------------
Millions of Dollars
-------------------
Operating Income
Reported net income $29 75
Less special items 6 -
- -----------------------------------------------------------------
Net operating income $23 75
=================================================================
Millions of Pounds
Except as Indicated
Operating Statistics -------------------
Production*
Ethylene 702 833
Polyethylene 655 563
Propylene 123 133
Polypropylene 129 113
Paraxylene 107 188
Cyclohexane (millions of gallons) 39 48
- -----------------------------------------------------------------
*Includes Phillips' share of equity affiliates' production.
The Chemicals segment's net operating income decreased 69 percent
in the first quarter of 1999, as a result of lower margins
experienced by key product lines, including ethylene,
polyethylene and aromatics. Excess industry capacity and weak
global demand continued to depress industry chemicals and
plastics margins in the first quarter of 1999. However, margins
for ethylene and polyethylene began improving early in the second
quarter, and the company anticipates improved results from these
business lines in the second quarter of 1999 if the improved
margins prove sustainable.
Various units at the Puerto Rico Core facility were shut down
30 to 60 days for a maintenance turnaround during the first
quarter of 1999, resulting in a 43 percent decrease in paraxylene
production volumes and a 19 percent reduction in cyclohexane
production volumes.
Special items in the first quarter of 1999 included a positive
contingency settlement, partially offset by foreign currency
losses and work force reduction charges.
21
<PAGE>
Corporate and Other
Millions of Dollars
-------------------
Three Months Ended
March 31
-------------------
1999 1998
-------------------
Operating Results
Reported Corporate and Other $(47) 27
Less special items 13 77
- -----------------------------------------------------------------
Adjusted Corporate and Other $(60) (50)
=================================================================
Adjusted Corporate and Other includes:
Corporate general and
administrative expenses $(20) (25)
Net interest (46) (30)
Preferred dividend requirements (10) (10)
Other items 16 15
- -----------------------------------------------------------------
Adjusted Corporate and Other $(60) (50)
=================================================================
Corporate general and administrative expenses were 20 percent
lower than a year ago, reflecting cost reduction efforts and
lower performance incentive accruals.
Net interest represents interest income and expense, net of
capitalized interest. Net interest costs increased 53 percent,
primarily resulting from higher average debt balances.
Preferred dividend requirements represent dividends on the
preferred securities of the Phillips 66 Capital Trusts I and II.
Other items consist primarily of the company's captive insurance
subsidiary, along with certain income tax and other items that
are not directly associated with the operating segments on a
stand-alone basis. Other items were positively impacted in both
the first quarter of 1999 and 1998 by dividends of $16 million
and $14 million, respectively, after-tax, received from a mutual
insurance company in which Phillips owns a stock interest.
Special items in the first quarter of 1999 primarily consisted of
a $24 million favorable resolution of prior years' U.S. income tax
issues, partially offset by non-cash foreign currency losses of
$14 million. Special items in the first quarter of 1998 included
insurance recoveries related to a comprehensive environmental
cost recovery project, as well as foreign currency transaction
gains.
22
<PAGE>
CAPITAL RESOURCES AND LIQUIDITY
Financial Indicators
Millions of Dollars
-------------------------------
At At At
March 31 December 31 March 31
1999 1998 1998
-------------------------------
Current ratio 1.2 1.1 1.1
Total debt $4,607 4,273 3,028
Company-obligated mandatorily
redeemable preferred securities $ 650 650 650
Common stockholders' equity $4,205 4,219 4,888
Percent of total debt to capital* 49% 47 35
Percent of floating-rate debt
to total debt 31% 37 21
- -----------------------------------------------------------------
*Capital includes total debt, company-obligated mandatorily
redeemable preferred securities and common stockholders' equity.
Cash from operations in first quarter 1999 decreased $472 million
from the same period in 1998. Contributing to this decrease was
a $153 million decrease in net operating income, and increases in
non-cash working capital. In addition, there was a $141 million
decrease in cash provided by the sale of accounts receivable
under the company's receivables monetization program. This
resulted from the sale of $150 million of receivables during
first quarter 1998, compared with only $9 million during first
quarter 1999.
In March 1999, the company issued $300 million of 6 3/8% Notes
due 2009, and $200 million of 7% Debentures due 2029, in the
public market. After the issue of these securities, $200 million
of securities remained available under the company's shelf
registration filed with the U.S. Securities and Exchange
Commission.
During the first three months of 1999, cash balances increased
$112 million. Cash was provided by operating activities, asset
dispositions of $104 million, and the previously mentioned
$300 million of notes and $200 million of debentures. Funds were
used to retire $42 million of medium-term notes and $115 million
of revolving debt, fund the company's capital expenditures
program, and pay dividends.
At March 31, 1999, there was no revolving debt outstanding under
the company's $1.5 billion revolving credit facility, but
$663 million of commercial paper was outstanding, which is
supported 100 percent by the credit facility. Also, the Phillips
Petroleum Company Norway $300 million revolving credit facility
was fully drawn at March 31, 1999.
23
<PAGE>
Phillips has two $50 million master leasing arrangements, under
which it leases and supervises the construction of retail
marketing outlets. At March 31, 1999, about $94 million had been
financed under the arrangements. The company now expects to
enter into arrangements for an additional $75 million during
1999.
In March 1999, Phillips settled litigation arising from an
accident that occurred during the installation of Aromax
technology at the company's Puerto Rico Core facilities in 1994.
The company received a net $15 million before-tax settlement from
the construction contractor, resulting in additional first
quarter 1999 net income of $10 million.
In late 1998, reductions of approximately 1,400 positions were
identified, primarily in the company's E&P segment and corporate
staffs, which resulted in a $91 million before-tax charge to
income. During first quarter 1999, an additional before-tax
accrual of $8 million was made, reflecting further reductions of
approximately 100 positions in the company's GPM, RM&T, and
Chemicals segments. At March 31, 1999, about 900 positions had
been eliminated, and about $14 million in severance benefits had
been paid.
In December 1998, agreement was reached with the Internal Revenue
Service (IRS) on the Kenai LNG and certain other tax issues for
years 1987 through 1992, the last years in which the Kenai LNG
income issue was in dispute. As a result, 1998 net income was
increased by $115 million. During first quarter 1999, net income
was increased by $24 million, reflecting favorable resolution of
other outstanding issues with the IRS. Cash refunds totaling
approximately $120 million applicable to all these issues were
received by the company in April 1999.
24
<PAGE>
Capital Expenditures and Investments
Millions of Dollars
-------------------------------------
Three Months Ended
March 31
------------------
Estimated 1999 1999 1998
-------------- ------------------
E&P $1,068 $214 268
GPM 110 14 13
RM&T 352 93 63
Chemicals 149 33 56
Corporate and Other 74 14 16
- -----------------------------------------------------------------
$1,753 $368 416
=================================================================
United States $ 939 $203 232
Foreign 814 165 184
- -----------------------------------------------------------------
$1,753 $368 416
=================================================================
In April 1999, Phillips' Board of Directors approved a 20 percent
increase in the company's 1999 capital budget, from
$1.465 billion to $1.753 billion. The E&P capital spending
program received the largest increase--from $800 million to
$1.07 billion. The increase is expected to be applied primarily
to the acquisition of an additional interest in the Bayu-Undan
unitized gas/condensate field in the Timor Sea's Zone of
Cooperation, and for the acquisition of interests in exploration
and production assets in North Louisiana.
Phillips has acquired The Broken Hill Proprietary Company
Limited's (BHP) interest in the Bayu-Undan gas/condensate field
in the Timor Sea's Zone of Cooperation (ZOCA) with the
acquisition of BHP's 42.42 percent interest in ZOCA block 91-12
(Undan). Along with Phillips' 60 percent interest in the
adjacent ZOCA block 91-13 (Bayu), the acquisition will bring
Phillips' total interest in the unitized Bayu-Undan field to
50.3 percent. It is expected that Phillips will become operator
of the unitized field. The company also agreed to acquire BHP's
interests in three producing oil fields--Elang, Kakatua and
Kakatua North--with gross production of 33,000 barrels of oil per
day, as well as permits for static gas resources in other
properties in ZOCA and Australian Commonwealth waters. Some of
these are subject to pre-emptive rights. Phillips expects to
book 98 million barrels of oil, condensate and natural gas
liquids in 1999 as a result of this acquisition. The acquisition
is expected to enable Phillips to move forward with plans to
develop the Bayu-Undan field to supply Australian gas markets and
international liquefied natural gas markets.
25
<PAGE>
In April 1999, the company entered into an exploration and
development agreement with Kelley Oil & Gas Corporation relating
to its interests in the West Bryceland and Sailes fields in North
Louisiana. Under the agreement, Phillips would pay $83 million
for Kelley's interests, and would operate, develop, exploit and
explore the assets. Kelley would retain an eight-year volumetric
overriding royalty interest totaling approximately 42 billion
cubic feet of gas. Closing is expected to occur in May 1999,
subject to required consents and certain conditions. The
agreement is expected to add 130 billion cubic feet of gas to the
company's reserves.
In the first quarter of 1999, oil production from the new
Ekofisk II production facilities continued to increase with
production in March reaching 107,000 barrels of oil per day, net
to Phillips. The Ekofisk Complex was shut down from April 22 to
May 2, to repair a leak in a gas cooling unit. During the
shutdown, the company was able to repair a poorly performing low-
pressure oil separator and complete priority maintenance work,
part of the work originally scheduled for an August shutdown.
The improved reliability and debottlenecking is expected to
result in slightly higher production levels during the remainder
of the second quarter. Gas processing on the 2/4 J platform is
currently performing below original design specifications and
an additional facility shutdown will be required to modify the
gas processing plant. The scheduled gas plant modifications are
now expected to result in an approximate one-week shutdown of the
Ekofisk II facilities during third quarter 1999.
Work is proceeding according to schedule on the Eldfisk water
injection project. This is the largest development project in
E&P's 1999 capital budget and is comprised of a new platform, as
well as modifications to existing platforms, in order to
accomplish waterflood, gas injection and gas lift. The new
water-injection platform, controlled from an existing manned
Eldfisk platform, is scheduled to begin water injection in fourth
quarter 1999. The remaining modifications to the existing
platforms are expected to be completed in the first quarter of
2000.
In late 1998, Phillips acquired a 7.1 percent interest in an
exploration project in the Kazakhstan sector of the Caspian Sea.
Drilling is now expected to begin on the first well there in
third quarter 1999.
In Denmark, first oil was produced from the Siri field on
March 1, 1999. Phillips owns a 12.5 percent interest in the
field. Net production reached 2,600 barrels of oil per day by
the end of March and is expected to reach a maximum level of
6,000 barrels of oil per day in the fourth quarter of 1999. Nine
26
<PAGE>
production and injection wells are planned and drilling is
scheduled to be completed early in the year 2000.
In the United Kingdom, production began from the Janice field in
February 1999, with production reaching 10,700 barrels of oil per
day, net to Phillips, by the end of the first quarter.
Production from the Renee field also began in February 1999, with
net production reaching 8,750 barrels of oil per day by the end
of the first quarter.
On March 31, 1999, Phillips closed the sale of its oil and gas
interests in central Oklahoma. This sale resulted in an after-
tax financial gain of $33 million.
GPM's 1999 capital budget was increased from $90 million to
$110 million, mainly due to the anticipated acquisition of a
gathering system in central Texas.
RM&T continued its retail-marketing rationalization and expansion
during the first quarter of 1999, with the opening of four new
outlets. In addition, two outlets were razed and rebuilt. Since
the expansion program began in 1996, the company has acquired
42 retail outlets, opened 49 new ones, and razed and rebuilt
26 others. Both new outlets and those that are razed and rebuilt
utilize the new Kicks 66 convenience store design. During the
first quarter, the company also sold one unit, bringing the total
to 77 retail units in non-strategic areas sold since the program
began.
Year 2000 Update
General
Phillips' companywide Year 2000 Project (Project) is proceeding
on schedule. The Project is addressing the issue of computer
programs and embedded computer chips being unable to distinguish
between the year 1900 and the year 2000. In 1995, in order to
improve access to business information through common, integrated
computing systems across the company, Phillips began a worldwide
business systems replacement project with systems that use
programs primarily from SAP America, Inc. (SAP) and, for certain
upstream operations, Oracle Corporation (Oracle). The new
systems, which are expected to make approximately 70 percent of
the company's business computer systems Year 2000 compliant, are
scheduled for completion and implementation by mid-1999.
Implementation of the SAP programs is on schedule and was
approximately 87 percent complete at March 31, 1999.
Implementation of the Oracle programs is on schedule and was
approximately 88 percent complete at that date. Remaining
27
<PAGE>
business software programs are expected to be made Year 2000
compliant through the Year 2000 Project, including those supplied
by vendors, or they will be retired. None of the company's other
information technology (IT) projects have been delayed due to the
implementation of the Year 2000 Project.
"Year 2000 compliant," as used in this discussion, means that a
date-handling problem relating to the Year 2000 date change that
would cause computers, software or other equipment to fail to
correctly perform, process and handle date-related data for the
dates within and between the 20th and 21st centuries, is not
expected to interfere with normal business operations.
Project
The Project is divided into four major sections--Infrastructure,
Applications Software (Infrastructure and Applications Software
are collectively referred to as "IT Systems"), third-party
suppliers and customers (External Agents), and process control
and instrumentation (PC&I). The four sections are coordinated
companywide by a Program Management Office (PMO), which is
comprised of a cross-functional team and includes a business
continuity/contingency manager. PMO representatives meet
regularly with executive management, and periodically advise the
Audit Committee and the Board of Directors on the status of the
Project.
The company has engaged various third parties to assist in the
completion of certain phases of the Project. The general phases
common to all sections are: (1) inventorying Year 2000 items;
(2) assigning priorities to identified items; (3) assessing the
Year 2000 compliance of items determined to be material to the
company; (4) repairing or replacing material items that are
determined not to be Year 2000 compliant; (5) testing material
items; and (6) designing and implementing contingency and
business continuation plans for each organization and company
location.
The inventory, prioritization and assessment phases of each
section of the Project have been completed. Material items are
those believed by the company to have a risk involving the safety
of individuals, or that may cause damage to property or the
environment, or affect net income or cash flows. The testing
phases of the Project are being performed by the company.
The company estimates that 91 percent of scheduled Project
activities were complete at March 31, 1999. The following table
shows the estimated percentage of completed scheduled activities
by each section of the Project at March 31, 1999:
28
<PAGE>
Percent
Completed
---------
Sections
Infrastructure 93%
Applications software 95
(Third-party remediation 99%)
(In-house remediation 93%)
(Vendor upgrades/replacements 90%)
PC&I 91
External agents 77
(Tier 1 assessment 100%)
(Tier 2 assessment 100%)
(Tier 1 contingency planning 100%)
(Tier 1 reassessment 100%)
(Tier 2 reassessment--scheduled for
second quarter 1999)
(Tier 2 contingency planning--scheduled for
second quarter 1999)
(Tier 1 reassessment--scheduled for
third quarter 1999)
Total project 91
- ----------------------------------------------------------------
The company expects that substantially all scheduled Project
activities for the Infrastructure, Applications Software and PC&I
sections will be completed by June 30, 1999. The remaining
activities in those sections are expected to be completed in the
last half of 1999 because of scheduled facility turnarounds and
vendor scheduling.
IT Systems
The Infrastructure section consists of hardware and systems
software other than Applications Software. This section is on
schedule, and the company estimates that approximately 93 percent
of the planned activities related to the section had been
completed at March 31, 1999. The testing phase is ongoing as
hardware or system software is remediated, upgraded or replaced.
Contingency planning for this section commenced in third quarter
1998 and is scheduled for completion by mid-1999.
The Applications Software section includes both the conversion of
applications software that is not Year 2000 compliant and, where
available from the supplier, the replacement of such software.
The company estimates that the software conversion phase was
96 percent complete at March 31, 1999. The vendor software
replacements and upgrades were approximately 90 percent complete
at March 31, 1999. The company estimates that, overall,
29
<PAGE>
95 percent of the planned activities of the Applications Software
section were complete at March 31, 1999. Testing is conducted as
software is repaired or replaced. Contingency planning for this
section began in third quarter 1998 and is scheduled for
completion by mid-1999.
PC&I
The PC&I section of the Project includes the hardware, software
and associated embedded computer chips that are used in the
operation of all facilities operated by the company. This
section is on schedule and the company believes that the repair
and testing of PC&I equipment was approximately 91 percent
complete at March 31, 1999. Contingency planning for this
section began in third quarter 1998 and is scheduled for
completion by mid-1999.
External Agents
The External Agents section includes the process of identifying
and prioritizing critical suppliers, customers and partners, by
direct contact if possible, and communicating with them about
their plans and progress in addressing the Year 2000 problem.
Initial detailed evaluations of approximately 1,700 third parties
have been completed, with an estimated 700 of those classified as
most critical to the company. These evaluations were followed by
the development of preliminary contingency plans where results of
the initial assessment indicated that such plans might be
necessary. Completion of final contingency plans for this
section is scheduled for mid-1999. The company estimates that
this section was on schedule and 77 percent of its scheduled
activities were complete at March 31, 1999. The process of
evaluating these external agents began in third quarter 1998 and
is scheduled for completion by mid-1999. The company plans to
continuously monitor critical external agents by conducting
follow-up reviews of those critical external agents on a schedule
that extends to year-end 1999.
Business Continuity/Contingency Planning
The company has business continuity and disaster recovery plans
in place that cover its worldwide operations. Specific Year 2000
contingency planning is in process in all sections of the
Project. The company is incorporating specific Year 2000
contingency planning into its existing business continuity and
disaster recovery plans and expects to complete substantially all
of this planning by mid-1999, with follow-up reviews through year
end.
30
<PAGE>
The company currently believes that the most reasonably likely
worst-case scenario is that there will be some Year 2000
disruptions at individual locations that could affect individual
business processes, facilities or third parties for a short time.
The company does not expect such disruptions to be long-term, or
for the disruptions to affect the operations of the company as a
whole. Because of the uncertainty as to the exact nature or
location of potential Year 2000-related problems that might
arise, the business continuity/contingency planning will focus on
development of flexible plans to minimize the scope and duration
of any Year 2000 disruptions that might occur. The company
expects to have personnel and resources available to deal with
any Year 2000 problems that occur. Some of the contingency
actions under consideration include designating emergency
response teams, stockpiling inventories, increasing staffing at
critical times, arranging for alternative suppliers of critical
products and services, and developing manual workarounds.
Costs
The company's latest estimate of total cost of the Year 2000
Project is $43 million. This estimate includes Phillips'
estimated share of Year 2000 repair and replacement costs that
may be incurred by partnerships and joint ventures in which the
company participates but is not the operator, but does not
include any estimates of liability for non-compliance. The
following table shows the approximate amounts expended by various
sections of the Project through March 31, 1999:
Millions
of Dollars
----------
Sections
IT systems (includes program management costs) $22
PC&I 8
External agents (includes continuity planning costs) 2
- -----------------------------------------------------------------
Total $32
=================================================================
The company estimates that the future cost of completing the
Year 2000 Project will not exceed $11 million--$3 million to
repair or replace IT systems and manage the overall Year 2000
Project, $4 million to repair or replace non-compliant PC&I
equipment and software, $1 million to identify and communicate
with external agents and to develop contingency plans, including
business continuity planning, and $3 million for operations for
which Phillips is not the operator. The costs of implementing
the SAP and Oracle business replacement systems are not included
in these cost estimates.
31
<PAGE>
Risks
The failure to correct a material Year 2000 problem could result
in an interruption in, or a failure of, certain normal business
activities or operations. Such failures could materially and
adversely affect the company's results of operations, liquidity
and financial condition. Due to the general uncertainty inherent
in the Year 2000 problem, resulting in part from the uncertainty
of the Year 2000 readiness of third-party suppliers and
customers, the company is unable to determine at this time
whether the consequences of Year 2000 failures will have a
material impact on the company's results of operations, liquidity
or financial condition. The Year 2000 Project is expected to
significantly reduce the company's level of uncertainty about the
Year 2000 problem and, in particular, about the Year 2000
compliance and readiness of its material external agents. The
company believes that, with the implementation of new business
systems and the completion of the Project as scheduled, the
possibility of significant interruptions of normal operations
should be reduced.
Contingencies
Legal and Tax Matters
Phillips accrues for contingencies when a loss is probable and
the amounts can be reasonably estimated. Based on currently
available information, the company believes that it is remote
that future costs related to known contingent liability exposures
will exceed current accruals by an amount that would have a
material adverse impact on the company's financial statements.
Environmental
Most aspects of the businesses in which the company engages are
subject to various federal, state, local and foreign
environmental laws and regulations. Similar to other companies
in the petroleum and chemical industries, the company incurs
costs for preventive and corrective actions at facilities and
waste disposal sites.
Phillips may be obligated to take remedial action as the result
of the enactment of laws, such as the federal Superfund law, the
issuance of new regulations, or as a result of leaks and spills.
In addition, an obligation may arise when a facility is closed or
sold. Most of the expenditures to fulfill these obligations
relate to facilities and sites where past operations followed
practices and procedures that were considered appropriate under
32
<PAGE>
regulations, if any, existing at the time, but may now require
investigatory or remedial work to adequately protect the
environment or address new regulatory requirements.
At year-end 1998, Phillips reported 45 sites where it had
information indicating that it might have been identified as a
Potentially Responsible Party (PRP). Since then, no sites have
been resolved or added. Of these 45 sites, the company believes
it has a legal defense or its records indicate no involvement for
13 sites. At eight sites, present information indicates that it
is probable that the company's exposure is less than $100,000 per
site. At seven sites, Phillips has had no communication or
activity with government agencies or other PRPs in more than two
years. Of the 17 remaining sites, the company has provided for
any probable costs that can be reasonably estimated.
Phillips does not consider the number of sites at which it has
been designated potentially responsible by state or federal
agencies as a relevant measure of liability. Some companies may
be involved in few sites but have much larger liabilities than
companies involved in many more sites. Although liability of
those potentially responsible is generally joint and several for
federal sites and frequently so for state sites, the company is
usually but one of many companies cited at a particular site. It
has, to date, been successful in sharing clean-up costs with
other financially sound companies. Many of the sites at which
the company is potentially responsible are still under
investigation by the Environmental Protection Agency (EPA) or the
state agencies concerned. Prior to actual clean-up, those
potentially responsible normally assess site conditions,
apportion responsibility and determine the appropriate
remediation. In some instances, Phillips may have no liability
or attain a settlement of liability. Actual clean-up costs
generally occur after the parties obtain EPA or equivalent state
agency approval.
At March 31, 1999, $5 million had been accrued for the company's
unresolved PRP sites. In addition, the company has accrued
$58 million for other planned remediation activities, including
resolved state, PRP, and other federal sites, as well as sites
where no claims have been asserted, and $4 million for other
environmental contingent liabilities, for total environmental
accruals of $67 million.
After an assessment of environmental exposures for clean-up and
other costs, the company makes accruals on an undiscounted basis
for planned investigation and remediation activities for sites
where it is probable that future costs will be incurred and these
costs can be reasonably estimated. These accruals have not been
reduced for possible insurance recoveries, although claims for
33
<PAGE>
recovery of remediation costs have been filed with certain of the
company's insurers.
OUTLOOK
A late-March 1999 agreement by OPEC to further reduce production
volumes has caused crude oil prices to increase to their highest
levels since late 1997. Since mid-March, natural gas prices have
also begun to strengthen due to higher fuel oil prices and
reductions in excess inventories. Natural gas prices will be
influenced by the pace of storage injections, additions to
production deliverability, and weather. Margins in the company's
refining, marketing and transportation, and chemicals businesses
are also showing signs of improvement. New production from three
North Sea fields--Renee, Janice and Siri--and production from the
Rubie field, expected in May 1999, as well as production from the
newly acquired Elang field in the Timor Sea, should also benefit
earnings in the second quarter.
On March 23, 1999, Phillips and its co-venturers announced the
discovery of a new Prudhoe Bay satellite field on the North Slope
of Alaska. A discovery well in the Kuparuk formation tested over
1,900 barrels of oil per day and 1.3 million cubic feet of gas
per day. The Kuparuk accumulation, which will be named the
Aurora field, is estimated to contain 20 to 35 million
recoverable barrels of oil, including adjacent leases held by
Phillips and its co-venturers. Plans are being evaluated for
additional appraisal activities at Aurora during 1999. Phillips
holds a 12 percent interest in Aurora.
Phillips and its co-venturers have received notice from the
operator of the Point Arguello field, offshore California, of its
intent to resign as operator. A successor operator has not been
designated. As a result, the operator began the shutdown of the
first of three platforms in the unit on May 1, 1999, and has
plans to complete the shutdown of the other platforms and onshore
processing facilities by July 1999. The remaining co-venturers
and the Minerals Management Service are evaluating alternatives
to resume operations or possibly begin abandonment of the field
and related onshore facilities. Phillips previously made a
financial provision for future abandonment expense to the full
extent of current cost estimates. Production from the Point
Arguello field averaged 5,570 net barrels of oil per day during
the first quarter of 1999, with income and cash flow at
approximately breakeven. In 1996, Phillips wrote off its
remaining investment in Point Arguello when expected cash flows
from the field were reduced as a result of rapidly declining
production rates.
34
<PAGE>
Phillips holds interests in three projects acquired in the
Venezuela third bid round. Phillips holds a 31.5 percent
interest in and is operator of the La Vela block offshore
northwest Venezuela where two exploratory wells have been
drilled. One well was permanently plugged and abandoned May 1,
1999. Testing of the other well is expected to be completed by
the end of second quarter 1999. Ambrosio is a redevelopment
project operated by Phillips in Lake Maracaibo, of which the
company holds a 90 percent interest. Field activities have
included well workovers, facility maintenance, and modifications
to existing infrastructure. Drilling began on the first major
development well there during first quarter 1999 and is expected
to be completed during second quarter 1999. LL-652 is a
redevelopment and secondary recovery project in Lake Maracaibo,
in which Phillips holds an 18 percent interest. This project is
proceeding, but capital cost levels are higher than originally
expected.
Phillips is participating with a subsidiary of Venezuela's state
oil company, along with two other co-venturers, to study
development of heavy oil reserves from the Hamaca region in the
Orinoco Oil Belt in Central Venezuela. Phillips holds a 20
percent interest. The operating company is finalizing a proposed
development plan, which would provide 35,000 gross barrels per
day of heavy oil production in early 2001, and 190,000 gross
barrels per day of upgraded oil beginning in 2004. The
development plan will be considered for approval by the
participants in mid-1999.
Phillips operates in three countries where cutbacks in production
were announced in 1998. The Norwegian Ministry of Petroleum and
Energy has increased the production curtailment measures for oil
production on the Norwegian continental shelf in 1999. It will
amount to a 6 percent reduction, based on updated production
forecasts given to the Ministry, and is expected to have a
limited duration--ending June 30, 1999. The Nigerian government
dictated quota reductions totaling 19.5 percent, effective
April 1, 1999, which are expected to continue throughout 1999.
These affect leases operated on behalf of the company under the
joint operating agreement with Nigerian Agip Oil Company.
Venezuela, an OPEC member, has agreed to cut back oil production,
but third-bid-round-property operators have not been asked to
curtail production. Based on the above, the company does not
expect the economic impact of these announced production
curtailments in any of the three countries to have a material
adverse impact on the company's results of operations or
financial position in 1999.
35
<PAGE>
CAUTIONARY STATEMENT FOR THE PURPOSES OF THE "SAFE HARBOR"
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995
Phillips is including the following cautionary statement to take
advantage of the "safe harbor" provisions of the PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995 for any forward-looking
statement made by, or on behalf of, the company. The factors
identified in this cautionary statement are important factors
(but not necessarily all important factors) that could cause
actual results to differ materially from those expressed in any
forward-looking statement made by, or on behalf of, the company.
Where any such forward-looking statement includes a statement of
the assumptions or bases underlying such forward-looking
statement, the company cautions that, while it believes such
assumptions or bases to be reasonable and makes them in good
faith, assumed facts or bases almost always vary from actual
results, and the differences between assumed facts or bases and
actual results can be material, depending on the circumstances.
Where, in any forward-looking statement, the company, or its
Management, expresses an expectation or belief as to future
results, such expectation or belief is expressed in good faith
and believed to have a reasonable basis, but there can be no
assurance that the statement of expectation or belief will
result, or be achieved or accomplished.
Taking into account the foregoing, the following are identified
as important risk factors that could cause actual results to
differ materially from those expressed in any forward-looking
statement made by, or on behalf of, the company:
o Plans to drill wells and develop offshore or onshore
exploration and production properties are subject to (1) the
company's ability to obtain agreements from co-venturers or
partners, and governments; engage drilling, construction and
other contractors; obtain economical and timely financing;
(2) geological, land, or sea conditions; (3) world prices
for oil, natural gas and natural gas liquids; and
(4) foreign and United States laws, including tax laws.
o Plans for the construction, modernization or debottlenecking
of domestic and foreign refineries and chemical plants, and
the timing of production from such plants are subject to
approval from the company's and/or subsidiaries' Boards of
Directors; loan or project financing; the issuance by
foreign, federal, state, and municipal governments, or
agencies thereof, of building, environmental and other
permits; and the availability of specialized contractors and
work force. Production and delivery of the company's
products are subject to worldwide prices and demand for the
products; availability of raw materials; and the
36
<PAGE>
availability of transportation in the form of pipelines,
railcars, trucks or ships.
o The ability to meet liquidity requirements, including the
funding of the company's capital program from operations, is
subject to changes in the commodity prices of the company's
basic products of oil, natural gas and natural gas liquids,
over which Phillips has no control, and to a lesser extent
the commodity prices for its chemical and other products;
its ability to operate its refineries and chemical plants
consistently; and the effect of foreign and domestic
legislation of federal, state and municipal governments that
have jurisdiction in regard to taxes, the environment and
human resources.
o Estimates of proved reserves, raw natural gas supplies,
project cost estimates, and planned spending for maintenance
and environmental remediation were developed by company
personnel using the latest available information and data,
and recognized techniques of estimating, including those
prescribed by the U.S. Securities and Exchange Commission,
generally accepted accounting principles and other
applicable requirements.
o The dates on which the company believes the Year 2000
Project will be completed and the SAP and Oracle business
computer systems will be implemented are based on
Management's best estimates, which were derived utilizing
numerous assumptions of future events, including the
continued availability of certain resources, third-party
modification plans and other factors. However, there can be
no guarantee that these estimates will be achieved, or that
there will not be a delay in, or increased costs associated
with, the implementation of the Year 2000 Project. Specific
factors that might cause differences between the estimates
and actual results include, but are not limited to, the
availability and cost of personnel trained in these areas,
the ability to locate and correct all relevant computer
code, timely responses to and corrections by third-parties
and suppliers, the ability to implement interfaces between
the new systems and the systems not being replaced, and
similar uncertainties. Due to general uncertainty inherent
in the Year 2000 problem, resulting in part from the
uncertainty of the Year 2000 readiness of third-parties and
the interconnection of global businesses, the company cannot
ensure its ability to timely and cost-effectively resolve
problems associated with the Year 2000 issue that may affect
its operations and business or expose it to third-party
liability.
37
<PAGE>
PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
- --------
12 Computation of Ratio of Earnings to Fixed Charges.
27 Financial Data Schedule.
Reports on Form 8-K
- -------------------
During the three months ended March 31, 1999, the company did not
file any reports on Form 8-K.
38
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
PHILLIPS PETROLEUM COMPANY
/s/ Rand C. Berney
----------------------------------
Rand C. Berney
Vice President and Controller
(Chief Accounting and Duly
Authorized Officer)
May 13, 1999
39
<PAGE>
Exhibit 12
PHILLIPS PETROLEUM COMPANY AND CONSOLIDATED SUBSIDIARIES
TOTAL ENTERPRISE
Computation of Ratio of Earnings to Fixed Charges
Millions of Dollars
---------------------------
Three Months Ended March 31
1999 1998
---------------------------
(Unaudited)
Earnings Available for Fixed Charges
Income before income taxes $ 99 452
Distributions in excess of (less than)
equity in earnings of less-than-
fifty-percent-owned companies (6) 2
Fixed charges, excluding capitalized
interest* 100 77
-------------------------------------------------------------------------
$193 531
=========================================================================
Fixed Charges
Interest and expense on indebtedness,
excluding capitalized interest $ 71 51
Capitalized interest 9 13
Preferred dividend requirements of
capital trusts 13 13
One-third of rental expense, net of
subleasing income, for operating leases 11 10
-------------------------------------------------------------------------
$104 87
=========================================================================
Ratio of Earnings to Fixed Charges 1.9 6.1
-------------------------------------------------------------------------
*Includes amortization of capitalized interest totaling approximately
$5 million and $4 million in 1999 and 1998, respectively.
Earnings available for fixed charges include, if any, the company's
equity in losses of companies owned less than 50 percent and having debt
for which the company is contingently liable. Fixed charges include the
company's proportionate share, if any, of interest relating to the
contingent debt.
In 1990 and 1988, respectively, the company guaranteed a $400 million
bank loan and $250 million of notes payable for the Long-Term Stock
Savings Plan (LTSSP), an employee benefit plan. In 1994, the notes
payable were refinanced with a $131 million term loan, which was repaid
in June 1998. The $400 million loan was amended in 1994, 1995, and again
in 1997. Consolidated interest expense included a minimal amount of
interest related to LTSSP borrowings in both the first quarter of 1999
and 1998.
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet of Phillips Petroleum Company as of March 31,
1999, and the related consolidated statement of income for the three months
ended March 31, 1999, and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 209
<SECURITIES> 0
<RECEIVABLES> 1,371
<ALLOWANCES> 16
<INVENTORY> 539
<CURRENT-ASSETS> 2,556
<PP&E> 22,872
<DEPRECIATION> 12,262
<TOTAL-ASSETS> 14,460
<CURRENT-LIABILITIES> 2,055
<BONDS> 4,490
650
0
<COMMON> 210
<OTHER-SE> 3,995
<TOTAL-LIABILITY-AND-EQUITY> 14,460
<SALES> 2,421
<TOTAL-REVENUES> 2,539
<CGS> 2,124<F1>
<TOTAL-COSTS> 2,185<F2>
<OTHER-EXPENSES> 13<F3>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 67
<INCOME-PRETAX> 99
<INCOME-TAX> 29
<INCOME-CONTINUING> 70
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 70
<EPS-PRIMARY> .28
<EPS-DILUTED> .28
<FN>
<F1> Purchased crude oil and products + Production and operating expenses +
Exploration expenses + Depreciation, depletion and amortization.
<F2> CGS + Taxes other than income taxes.
<F3> Preferred dividend requirements of capital trusts.
</FN>
</TABLE>
